the best way to predict the future is to create it.

Nature’s Way to Beautiful

“Businesses have the power to do good. That’s why The Body Shop’s Mission Statement opens with the overriding commitment, ‘To dedicate our business to the pursuit of social and environmental change.’ We use our stores and our products to help communicate human rights and environmental issues.” – Anita Roddick, Founder of The Body Shop.

In the world of cosmetics, consumers have long made purchasing decisions on a multitude of conventional attributes: price, efficacy, image, and quality.

Until Anna Roddick changed the game.

On March 26th, 1976, the city of Brighton, England was introduced to the very first Body Shop, founded upon a succinct vision: to dedicate its business to the pursuit of social and environmental change. Why? Because founderAnna Roddick firmly believed that business has the power to do good.

Just six years later, new Body Shop locations were being established at an average rate of 2 stores/month. Impressively, in its first ten years as a public company, The Body Shop’s stock price averaged 40% annual appreciation.

The Body Shop, with its steadfast commitment to fair trade and an unwavering opposition to animal testing, effectively introduced sustainability as a new product attribute for cosmetic consumption consideration.

Over the new few decades, companies in the cosmetics industry futilely attempted to follow suit, introducing “natural” lotions and “organic” creams – but they faced an uphill battle as The Body Shop had already been crowned King by the consuming public.

And low and behold, The Body Shop became synonymous with social justice: writing petitions for human rights, winning awards for preventing animal cruelty, sporting Greenpeace posters in store windows, forming alliances with Amnesty International, UNICEF, and the Breast Cancer Association, and engaging in campaigns to alleviate global warming and end domestic violence toward women and children.

In an undeniably brilliant move on behalf of L’Oreal, on March 17th, 2006, the world’s largest cosmetics maker acquired the poster child of sustainability [acquisition price: 652.3 million GBP].

Today, L’Oreal eagerly boasts of its commitment to sustainability:

“Sustainability is completely integrated into our business model; it is not a program apart. In order to be embedded into the business strategy, it has to cover the entire value chain. First innovation; then production.” – Alexander Palt, Chief Sustainability Officer, L’Oreal.

Interestingly enough, the initial reaction was far from pleasant. In fact, L’Oreal actually lost investors when it acquired the less profitable Body Shop. The common investor inquiry: what is the world’s largest cosmetics maker doing acquiring a company that pales in profit comparison?!

But within one year, investor sentiment took a turn. An appetite for green cosmetics took over and L’Oreal now sat at the forefront, unparalleled to its competitors.

Natural. Organic. Green.

What, you may ask, do these terms specifically mean?

It’s a fair question.

Yet, companies continuously brand their products with these ambiguous terms. One can certainly be natural without being green. And what constitutes organic anyway?

The lack of mandatory verification and transparency leaves the suspicious consumer no choice but to accept the labels put forth. Credibility is thus built on the consumer belief in “certified” labels. Consequently, it becomes vital to a company’s image to adhere not just to natural and organic practices, but also a wide sustainability net. Imagine if a company advocates its commitment to environmental sustainability and is subsequently caught polluting the environment. Said company has now diluted the credibility of all its claims, even those completely outside the realm of sustainability.

The Body Shop effectively raised the stakes for the entire cosmetics industry.

A Paradigm for Sustainability: The Brilliance of the L’Oreal Strategy

With the acquisition of The Body Shop and its head-start in sustainability, L’Oreal changed the playing field. The Body Shop was a small competitor endorsing social justice as a factor. Once L’Oreal acquired the niche specialist, L’Oreal’s marketing expertise, market share, and consumer loyalty, coerced sustainability and social justice to become vital to a cosmetic company’s success.

As other cosmetic companies launched natural and organic products, sustainability as a factor attribute became more important in the consumer mind. Sustainable practices became vital to decisions, and thus L’Oreal’s ability to grasp market share rose in tandem with its commitment to sustainability and natural products. Lagging competitors struggled to catch up.

Present day: the cosmetics industry, with a steadfast focus on products that boast image, has embraced sustainability more so than any other industry.

Consumer identification with product is vital. Although the natural cosmetics segment is only $10 billion of a $400 billion cosmetics industry pie, the natural segment is growing at 10% vs. an industry CAGRof 3-4%. Natural and organic product lines highlight the green attributes of entire companies, helping identify companies with a sustainable glow. And as sustainability grows in importance, the sustainable glow of a company sheds light (pun intended) on its other business operations.

Here’s why this is important. L’Oreal successfully turned its competitive advantage into the heaviest-weighted product attribute for decision making. This concept expands far beyond sustainability. Consider a hypothetical Company A, renowned for being a low-cost producer. If Company A successfully enables “cost” to become the most valued product attribute to consumers, Company A is rewarded by profits, an enhanced brand image, and repeat customers. Company A wins.

The implications are tremendous. Suppose consumer demand is a function of factors, each weighted by significance as to the ultimate impact on purchasing decision.

A sustainable factor model would look as such:

Consumer Demand for Company X = a + bF(Sustainability) + cF(Price)

Lessons can be gleaned.

Lesson #1: Become a sustainable leader in your industry.

Create and/or acquire a new product line to be the leader in natural or organic.

Change company practices to be consistent with sustainability. Do not confuse the consumer.

Lesson #2: Enable sustainability to hold the most weight in the consumer decision making factor model.

Simon – thanks for reading. I am not sure I understand the question. What would you like to be highlighted from the Guardian? Content ideas are always welcome – please feel free to email me at thesustainableinvestor@gmail.com!

An interesting notion Kiki. My personal belief is that cosmetics companies are focused on image whether or not said companies adhere to sustainable practices. Thus, given the existing presence of many cosmetics companies, ceteris paribus, I would much prefer these companies to produce natural products with sustainable sourcing – positive externalities on society and environment.